Small Business Strategies: Deal Site or No Deal Site?

Oct. 1, 2011 — -- Everybody loves a deal.

The prospect of getting a bargain has driven the phenomenal success of daily deal sites such as Groupon, Living Social, and hundreds of others. While these deals may be great for consumers, are they a good idea for you to promote your small business and generate sales?

Yes. No. Maybe.

Your success with daily deal sites all depends on how, when, and why you use them.

I asked small businesses to share their experiences using daily deal sites and heard from dozens.

For some, these offers were invaluable business builders. Others rued the day they ever signed up — losing money, attracting only bargain-hunting customers.

The two largest sites, Groupon and LivingSocial, are well known, but there are hundreds, such as Gilt.com or RueLaLa for fashion, Zulilly and Totsy for kids stuff, Mamapedia and PlumDistrict for moms, LifeBooker for health and beauty. (Gannett has its own Deal Chicken.)

A deal site sends an email daily to those who've signed up. You pay nothing to be included, but the deal site gets a hefty percentage of a sale — 40% to 50%. Typically, you must offer at least a 50% discount.

So here's what a money breakdown might look like: You offer your normal $100 carpet cleaning for $50. With each sale, you get $25, the site gets $25. Those who never redeem the coupon add to your profit margin: Businesses report 5% to 40% nonredemption rates.

If you're considering doing a daily deal offer, keep these strategies mind:

1. Offer services, rather than products. It's generally far less costly since you don't have the cost of goods.

Spokeswoman Julie Mosler says the majority of Groupon's deals now are what she calls "experiences."

"We make money on the food we sell," said Eliza Ward, co-owner of ChefShop in Seattle, who has successfully used deal sites for discounts on cooking classes. "If I were to give away a $20 gift certificate for $10 worth of product, it wouldn't work for us financially."

2. Create offers where customers come back repeatedly to help build a committed customer base.

"With our second deal (with Groupon), we raised the price and made the offer for three oil changes," said Matt Allen, owner of Virginia Auto Service in Phoenix. "The number of sales dropped by half — 242 were sold. But we got a customer that better matches our desired customer base."

3. Try not to cannibalize existing customers. Deals are best to launch a new business, to try during slow periods, or to move excess inventory.

4. Test. Try different offers and different sites to see what works for you.

A more targeted site may be a better fit and less costly than a general, national site. ChefShop's Ward started with RueLaLa and Tippr, smaller sites before going to LivingSocial.

"Once we felt confident about what deal was affordable and do-able for us, we offered it on LivingSocial," she said.

5. Place a cap on the number sold— an absolute must — and start with a small number. Make sure your staff can handle the increased demand.

"Some merchant's eyes are bigger than their stomachs," Groupon's Mosler said.

6. Include your own fine print. Limit redemption to only one per customer, not to be combined with other discounts, and other limits that make sense to protect you.